The process of buying a car without a good credit score can feel like playing a game of darts - blindfolded. You've probably missed the target (gotten denied) time and time again while the goal of obtaining a good credit score and the car you need remains out of sight. Many car shoppers run into roadblocks when applying for loans because of poor credit histories, but some are missing the target simply because they don't have enough credit built up. To help you find the best strategy for hitting the auto loan bullseye, we'll break down these two common obstacles and how to overcome them.
Bad Credit Car Loans
Bad credit, sometimes called "subprime", is defined as a score below 670 on FICO's rating system. A credit score of 300-670 will make auto loan approval difficult and will significantly increase interest rates on the loan. Factors that influence your credit score include payment history for loans and credit cards as well as credit inquiries. Missed payments, loan defaults, and bankruptcy are the most common reasons for a low credit score.
A car shopper with subprime credit is a high-risk customer in the eyes of a lender. Because of their rocky payment history, they are more likely to see their auto loan application rejected, and if approved, they will be offered a much higher interest rate. Bad credit auto loans usually come with a premium of hundreds or even thousands of dollars over the terms of the loan due to the higher interest.
Tips for Buying a Car with Bad Credit
Although getting a car loan with subprime credit is difficult, it is usually possible. Consider saving up a substantial down payment, find a cosigner, or explore alternative lenders for the best shot at approval. A down payment of at least 20% on a new car and 10% for used will show a lender that you're in a position to make your payments. Bringing a cosigner will also reduce the lender's risk because they will be responsible for making payments if you're unable to. If you've had no luck getting an auto loan from your bank or at the dealership, look for alternative lenders like credit unions and online subprime lenders who specialize in compromised credit, but beware of higher interest rates.
No Credit Car Loans
Having no credit score is a common roadblock for young shoppers buying a car for the first time. Instead of a history of missed payments or bankruptcy, a shopper with no credit hasn't built up a payment history at all. According to U.S. News and World Report, earning a FICO score involves having one credit account that has reported in the past six months, and one account older than six months. Without meeting these criteria, a customer won't have a credit score tied to their name.
Is no credit score better than a bad credit score when buying a vehicle? Not necessarily. Car shoppers applying for an auto loan without a credit history are still seen as a risk for lenders just like shoppers with poor credit. Without having any credit built up, there is no proof they can keep up with future payments.
According to financial advisor, Brenton D. Harrison, "having no credit score is the equivalent of having a poor credit score because you can't prove to the lender you have a history of repaying your debts. That means paying higher interest at best, and at worst, being declined altogether."
Tips for Buying a Car with No Credit
To overcome the challenge of getting a car loan with no credit history, shoppers should enlist a cosigner, or find ways to build up their credit quickly. A close family member willing to cosign on the car loan will be the best solution for a young car buyer. Other options to build credit include becoming an authorized user on a family member's credit account, getting rent payments reported to the credit bureaus, or getting a credit builder loan.
Credit builder loans require the customer to make a small deposit (under $1,000) and pay back the loan over the course of 12 months, or the lender's specified time frame. After the term ends, the lender returns the deposit along with the interest earned. Although it will require some patience, a credit builder loan helps customers acquire a credit score or improve their credit rating.